Cryptocurrency

Beware: Company Tokens Are Not True Cryptocurrencies!

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Beware: Company Tokens Are Not True Cryptocurrencies! 102

Juan Villaverde is an econometrician and mathematician devoted to the analysis of cryptocurrencies since 2012. He leads the Weiss Ratings team of analysts and computer programmers who created Weiss cryptocurrency ratings.
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When companies like JPMorgan Chase or Facebook issue “cryptocurrencies,” everyone gets excited.

“Wow! Now crypto is really gonna to take off,” they think.

Maybe, sure. But the tokens they issue are not true cryptocurrencies. Nor does it make much sense to buy them. (Even if they can be bought somehow.)

If you want to participate in that endeavor, your better choice is to buy the company’s shares or other securities.

Here’s the source of the misunderstanding: When people hear about blockchain, many automatically think about Bitcoin, Ethereum or some other cryptocurrency.

Truth be told, there are many other use-cases for blockchain — and, more broadly speaking, for Distributed Ledger Technology. And these probably have nothing whatsoever to do with cryptocurrencies. They certainly have nothing to do with open, publicly traded cryptocurrencies.

This is important. Because it directly impacts WHICH vehicle you invest in:

  • When the distributed ledger (network) is public and open — like Bitcoin, Ethereum, EOS or Tron — it always has a publicly traded cryptocurrency. All else being equal, when the network is a success, the crypto should rise in value. We call these “coins” or “native tokens.” They were born with the network and they’re expected to stay there forever. So, as more people use the network, it’s reasonable to expect that the coins will go up in value. But …
  • When the distributed ledger is private and closed, like the recently announced JPM Coin or Facebook Coin, that’s a different story entirely. In these instances, it may be impossible to invest in the coin or native token directly, or there may be no token at all. Instead, the best way to profit from this kind of blockchain application is simply to buy the company’s shares. (Provided the company’s non-blockchain earnings are still alive and well, of course.)

To better understand this contrast, consider how different these public and private worlds really are …

In the world of public cryptocurrencies, there are two important reasons why the networks have tokens.

First, the token itself is often the value proposition of the network: In the case of Bitcoin, for example, the Bitcoin token is the whole reason it exists.

Second, the token is typically an incentive for people to perform tasks for the ledger: Smart contract platforms such as Ethereum and EOS are good examples. The Ether or EOS tokens have an important reason to exist — to reward folks for lending their computer resources and performing computational tasks for the benefit of users on the network.

These networks aren’t run by companies with employees who get paid a salary. They’re open to the public and can be run by virtually anyone who wishes to jump on board.

So without tokens to reward the participants, there would be no one to do the work and no one to provide computer time.

Heck, if they don’t get rewarded for it in some way, why should they even bother?

But …

In the world of private companies, we see little reason to create crypto tokens.

Let’s suppose a network is run by a company like Facebook or JPMorgan Chase. Or suppose it’s run by an insurance company that wants to use smart contracts to process insurance claims or perhaps even governments that use the technology to help enhance voting systems.

Do any of these guys need a publicly traded crypto asset?

The simple answer: No!

If Facebook wants to use blockchain (or any kind of Distributed Ledger Technology) to enhance the efficiency of its operations, the incentive is, hopefully, a better user experience, better customer retention and more profits for shareholders.

If a mutual insurance company creates a ledger to streamline its operations, it’s the agents and policyholders who benefit. They already have an incentive to help make sure it works. And if it’s a publicly traded insurer, the shareholders also have an incentive.

Ditto for hospitals. If they decide to use a common ledger to share patient information, access to the database is all the incentive these healthcare providers and patients should need. The healthcare providers are already getting paid. The patients simply want their info.

These are just a few of the examples that come to mind. But their common thread is clear:

With most private applications of Distributed Ledger Technology, the mere access to the network provides the incentive to participate. No other reward should be needed.

So let’s go back to JPMorgan and see how that could work …

The JPM Coin will likely be used strictly inside the company — for money transfers from one branch to another. The idea is to start replacing slow, expensive third-party transfer companies, especially SWIFT, the dominant global network for interbank transfers.

If you run one of JPM’s branch offices and you want to take advantage of this new technology, you’ll have to be an authorized participant on the network. And you may have to lend some of your computer resources to help make it run.

But here’s the key: Neither you nor anyone else can ever allow outsiders to join. That’s why JPM doesn’t need — and probably won’t launch — a publicly traded coin.

Any other institution that wants to use the technology for these kinds of applications will want to follow a very similar path …

On government voting systems, only eligible voters can participate.

On hospital networks, patient information is protected by privacy laws. Only patients themselves — and health professionals they designate — can have access.

None of these warrant public participation.

That being said, why would these institutions want or need a cryptocurrency to begin with? Our answer …

Things like JPM Coin or Facebook Coin are, at best, redundant and, at worst, a possible deception.

As I said at the outset, there seems to be a common misconception here:

Many people seem to think that a company “doing blockchain” implies there’s got to be a cryptocurrency somewhere in the mix.

There usually isn’t. And when there is, it’s probably not needed.

Don’t get me wrong. There are many valid corporate use-cases for Distributed Ledger Technology, and we’re delighted to see big companies exploring them.

Just bear in mind that the majority will never issue a token on their networks. When they do, it just makes me scratch my head.

Here’s where the excitement really begins …

Public open ledgers with true cryptocurrencies can help support the private closed ledgers. And vice-versa!

Imagine, for example, trading shares in Alphabet or Apple on a public platform based on Distributed Ledger Technology.

Imagine that the very same platform is also where you can trade crypto assets.

Convenient, right? But it doesn’t end there.

Next, consider this possibility. When you buy shares in the company, you get shareholder rights on steroids — the right to cast your shareholder votes not only on typical corporate issues, but also on a whole host of other things that could affect your results.

Or consider the possibilities of tokenizing some of your illiquid assets — like real estate, art, antiques and other collectibles … then offering shares in your assets on similar platforms … or trading them for other tokenized assets.

This is very different from what happened in 2017-’18.

In the 2017 crypto superboom, almost everyone and anyone could issue a token and sell it to unsuspecting investors with Initial Coin Offerings (ICOs). It didn’t seem to matter whether or not they actually needed tokens.

The big change we see ahead: As the cryptocurrency industry grows and matures, the overwhelming majority of companies will create crypto assets only when they’re truly needed. Otherwise, they’ll just stick with token-less, permissioned versions of their distributed ledgers. No crypto assets.

But we’re not there yet. Deceptions continue. So next time you invest in a crypto asset, be sure to ask the question: Does this token have a reason to exist? If not, steer clear.

And always remember: Blockchain is one thing. Cryptocurrency is another.

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